Hold the Optimism

Headlines: we have another stomach-in-throat drop coming, likely next week. Then a big bounce. The Hope Rally appears done. The air-pocket yesterday wasn't a mistake: only 30M shares traded in the fall, and no one can find a glitch. Fat Finger My Ass! cries ZH. Listen to the traders in the pit. We had already dropped 500 pts and when we fell like a knife there were no buyers. The only glitch was shocked disbelief. 

Fear is such a well-defined state it makes the market patterns clear. Greed too, but then greed is like fear - fear of falling behind. Just not quite as strong. During panics of fear and greed the market becomes easy to track. It has a trend. It is those times in between, when the market is correcting against trend, that markets become exasperating. This should be no surprise, as during corrections the system is in a high state of entropy (in a chaos theory or information theory sense - balanced inputs going in and out), whereas during trends the market has found order. One can look at markets as constantly seeking order, and when they find it, they move surprisingly fast. As we just found out. 

At the low yesterday, we had wiped out 8 months of gains in 3 weeks.  

The Hope Rally was corrective. It kept going up on shrinking volume and a narrower base - essentially, five big financial stocks like Citicorp. It seemed impervious to correction, and yet it meandered up slower and slower after an initial jump off March 2009. This is not how a trending market behaves. The financial press was fooled by the height of the bounce, not comparing it to the depth of the prior drop. In the end the Hope Rally corrected the 2008 drop in the normal range of a 50-62% retrace, and after breaking the 50% retrace, stopped right on cue at 62%. 

Thus it should not be a surprise that there is a large consensus among wave theory sites (Daneric/whose chart is below, Kenny, EWTrends, PUG, EWP, BlankFiend, Shanky/sort-of, among others): 

• the top is in
• we are in a wave 4 trinagle
• a drop below the spike low of yesterday is ahead

The implication (well stated by BlankFiend) is a pop and drop on Monday. The top of the A leg, Sp1138, cannot be broken in the pop, and the top of the C leg, 1129, should not be broken. If leg D is done, leg E would normally go back to touch the upper trendline, which is about halfway to C or 1116. The apex of the triangle points to 1113. It may not be much of a pop.  

 

There are of course a few optimists, such as Carl Futia, and a bunch hedging their predictions. That is to be expected. The bullish argument starts with the curious fact that we ended today spot on the 61.8% retrace of the rise from Feb5 (Sp1145) to Apr23 (1220). If this were a B wave of a zigzag, this is a normal outside distance for a correction, and the final C wave up to new highs should start on Monday. This argument treats the falling knife yesterday as an anomaly. Since no one has confirmed that a glitch occurred, it is better to treat yesterday as real but hard to believe. The buyers simply vanished. 

After such a severe drop, it should be no surprise that a bunch of technical indicators have become oversold, signaling a rally is due. At the same time, during crashes like this, indicators can stay oversold for a while. Catching a falling knife is a dangerous game. 

Give credit to where it is due: the Master got this right. EWI's Sinko-de-Mayo STU predicted a much deeper drop than all the others, including Neely, and we got it. 

Just a couple of weeks ago Prechter had set forth the many technical indicators of a top in his EWT. You can read the key points online today from EvilSpeculator. For all the bashing he gets, his record on the big calls since 2007 is very strong:

• called the 2007 top in June, right before the July top (October wasn't much higher)
• called the 2009 bottom in late Feb, within two weeks of the Hope Rally
• did not call the June top as the end
• prematurely called a top twice after that
• called this top within a week (Apr16 vs Apr23)

Tonight's STU confirms the triangle wave 4 count and predicts the deeper wave 5 ahead to complete the first big thrust down off the top. After that we get a bounce, which could retrace quite a bit of the drop (the summer rally before the Summer of Disillusionment sets in). MarketPulse gives some guidance for where wave 5 could end:

 

If that wave 5 breaks well below the Feb5 lows (Dow9835/Sp1044) and stays below (meaning doesn't pop right back over), this will confirm the end of the Hope Rally. 

The Hope Rally's hopes are hanging on a thin thread right now. 

If we bounce above that level, this signals that a final top is ahead, likely back up to the Sp1250 +/- 25 range. This seems unlikely, given how decisively we broke through the lower trendline of the Hope Rally, even given some alternative ways to count it, such as this large triangle (chart courtesy WaveCharts):

If the pop on Monday breaks through the 1129 and 1138 levels, the triangle may be a larger structure. Neely suggests this could be the start of a wave B triangle before the final rally to new highs. A bit of a dramatic triangle, but a count worth keeping in the back of the mind as we see how Monday turns out. 

The other possibility is that yesterday was an extended fifth wave, and is done at the Sp1066/Dow9870 level. A strong bounce would be expected, but not to new highs. A corrective wave cannot be a simple five-waves down. Typical levels for the bounce would be: 

• 38% bounce to 1125
• 50% bounce to 1143 
• 62% bounce to 1162

The next wave down would follow. If you still want to hang on that thin thread of a hope in the Hope Rally, the next big drop would have to stop above 1044. If this is a dramatic zigzag correction down, after the big bounce, the next wave down would typically go 100% (red pill) or 62% (blue pill) of the first wave. For the slim thread of hope, it would have to take bounce at least 50%, above 1140 at least, and then take the blue pill: 62% of the big drop of 154 pts is 95 pts. If indeed the bounce and drop somehow stays above the Feb5 level, after a few stopped hearts, it would be a great buying opportunity.

Comments

[DG]

"If you were actually aware of how the S&P 500 was calculated, you would have never mentioned that PG and MMM were only 1-2% of the index. But you did, and everyone here reading this can see just how naive and ignorant your reply was."

1-2% of the number of stocks in the index.

Again, it's irrelevant. Whether you want to agree with that or not is your own decision. I don't care.

Your link simply proves my point by factually (rather than in the hyperventilating style you are posting about it) that the largest constituent of the index accounts for 3% of the value. Friggin' yawn in the big scheme of things.

% Weight Largest Constituent 3.00%

So, my bottom line is: don't care. Feel free to have a heart attack over it, though.

[DG's Dad]

"All I know is that the real-time trade calls you've made have been pretty crappy, so it's not as if I'm blown away by your ability to translate your knowledge of ISO's into something of trading value."

As for trading off that Thursday pattern, I said just before the dump:

"Any .99 SPY point rally that takes less than 28 minutes is a buy."

(Posted by: DG | Thursday, May 06, 2010 at 11:44 AM)

Sorry my Son, but as much as you want to "pound your chest" and let everyone here know how BRILLIANT you are with your trading calls, I noticed the following post that you made (quoted below) in which you were looking to get LONG.

Your post was not only made at 11:28AM when the SPY was trading at 1113.74... but also just minutes before an 87 POINT COLLAPSE in the S&P. For some reason, you conveniently ignore this.

And for some reason, your twisted sense of reality has convinced you that you have the ability to interpret Elliott Wave in a precise and accurate manner, yet you clearly did not do so when it came to foreshadowing an 87 point collapse in the S&P just a few minutes later . . .

"Above 113.96 SPY is a long trade with a stop at 109."

(Posted by: DG | Thursday, May 06, 2010 at 11:28 AM)

Son, I really wish you would stop fooling with all of your egotistical blather about your stock market "calls" on these blogs. Your Mother and I would much rather prefer that you'd hit the books at school. After all, we are paying for your tuition.

Posted by: DG's Dad |

[DG]

Funny that this irritant keeps asking about a couple of stocks and wave analysis, since Neely already addressed exactly how deep this sort of rabbit-hole can go if you get consumed in this line of questioning, in an online chat in August, 2000:

"How does an ew analysis of the Dow take into account the fact that the index seems to be *adjusted* every few years, taking out the non-performers or old fashioned issues and inserting others more likely to do well? What I'm getting at is that it seems you're not measuring the same thing from one year to the next, no?"

"Specifically because of those adjustments, I DON’T follow the DOW - I follow the S&P. I don’t really worry about how the indexes are constructed - men who know MUCH more about that side of the business are busy trying to create accurate reflections of financial reality - I just follow the indexes. IF you worried about that, then you might as well worry about the individual pricing of EVERY stock, then the actual accounting practices of each company - there is a point you just have to TRUST that those who help run the system KNOW what they are doing - I just then follow the psychology associated with the markets ebb and flow"

So, let the bean counters of the world worry about whether or not a large drop in a 3% cap-weighted component of the index shaved 1% off the cash print at the low on Thursday. I've got better things to do with my time. The FACT of it is that anything more than an 80% but less than a 100% retracement, inclusive, of the February-April rally has the same implications from a wave structure perspective.

Of course, if this irritant actually understood wave theory, it would already understand that point and wouldn't bring up irrelevancies.

[marketman]

Ooops!
Looks like DG got busted ...looking UP just before the market collapsed.

[Michael's Post-Op Tranny Mother]

"Your post was not only made at 11:28AM when the SPY was trading at 1113.74... but also just minutes before an 87 POINT COLLAPSE in the S&P. For some reason, you conveniently ignore this."

Michael, don't forget that you didn't post anything during that time period except that you thought we'd have a "big run into the close". That was so off, that even a post-op tranny like me, your mother, could see that.

Now get off this website and call me for Mother's Day, you ungrateful adopted little turd!

[DG]

Ooops!
Looks like DG got busted ...looking UP just before the market collapsed.

Looks like "marketman" never heard of this:

http://en.wikipedia.org/wiki/Corresponding_conditional_%28logic%29

When I posted that 113.96 was .99 above the current price. When price started dropping like a rock, there was no point in continually updating the entry price, so I just stated the logic, i.e. .99 SPY rally in less than 28 minutes.

Thanks for playing, though. Now back into the storage chest with all the other sock puppets.

[yelnick]

RE: [Planet Yelnick] Steven_737 submitted a comment to "Hold the Optimism"

Steven_737, very interesting smoking gun. In the Era of Entitlement, we might see this pushed under the rug rather than made a cause celebe.

[Devil Uncle]

DG only post his good call.... what a surprise! And he has never admitted any bad market call... He is always perfect!

Such a perfect hypocritical soul, I'd like to take that send it to hell.

[DG]

DG only post his good call.... what a surprise! And he has never admitted any bad market call... He is always perfect!

Not true. I've posted set-ups that haven't worked out in the past and since I usually post the stop loss it's obvious when one doesn't work, as well as posting summaries of my win/loss record, showing that ~40% of my trades turn out to be losing trades.

I never have nor will ever claim to be perfect. In fact, one of the things I consistently point out is that trading is always a game of probability, not a game of certainty.

[Account Deleted]

DG Yelnick !!

It seems the Triangle count has gone awry.Now what other alternatives can we look at.

Regards
VB

[DG]

VB,

If you mean the Triangle Neely was looking at for wave-B, I'm not sure why you'd say it was gone awry. Stretching its limits, yes, but still within the necessary parameters. Wave-b of a Contracting Triangle can be larger than wave-a.

[Account Deleted]

DG !!

I am not talking about the Triangle mentioned by NEELY.I was referring to Triangle mentioned here in the post by Yelnick.The Intraday one.

Regards
VB